Six Mining Companies to Watch as M&A Heats UpContributed Opinion

Source: Thibaut Lepouttre for The Gold Report (7/22/16)

Precious metals prices have gained momentum since the start of this year, and corporate M&A activity is heating up again. Caesars Report's Thibaut Lepouttre highlights a handful of mining companies with market capitalizations attractive to larger companies looking to boost their project pipelines.

In the most recent mining merger and acquisition (M&A) activity, Goldcorp Inc. (G:TSX; GG:NYSE) acquired Kaminak Gold Corp. to get its hands on the Coffee project in Canada's Yukon Territory, and Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) is in the process of acquiring Goldrock Mines Corp. (GRM:TSX.V), whose flagship asset is the development-stage Lindero heap-leach project in Argentina.

As gold and silver prices seem to be holding their ground—resulting in increased target prices for both precious metals—it would be normal to expect more M&A transactions to occur in the second half of the year, as the midtier and senior producers wouldn't want to miss out on any deals.

Of course, one should never invest in a company purely based on buyout speculation, but sometimes there are plenty of arguments to be made about why a company could be on the short list of their larger competitors.

In the past 12–24 months, companies have not only been focusing on cutting costs, but also on making a run toward "safer" assets. Higher-risk projects have been sold, and practically all new deals were in regions with an acceptable geopolitical risk as companies refuse to invest hundreds of millions (or billions) in assets located in higher-risk countries where the returns are only marginally higher.

Today I will focus on some logical buyout targets in the Americas.

Junior exploration companies with an existing joint venture (JV) agreement are on top of the list. Not only does the existence of a JV deal confirm the company's asset has drawn the attention of other companies, but also those larger companies usually don't want to deal with minority partners on a project basis.

An excellent example would be Nordgold N.V. (NORD:LSE), which dislikes having minority partners on any of its projects. Even if there's a lot of opposition from the shareholders of the targeted company, Nordgold pushes through and usually secures 100% ownership of the asset it wants to get its hands on. That's what happened with High River Gold Mines several years ago—Nordgold wanted to own the Taparko-Bouroum and Bissa projects, rather than having High River Gold as a minority partner—and that's what might happen to Columbus Gold Corp. (CGT:TSX; CBGDF:OTCQX) as well.

Nordgold is earning a 50.01% stake in Columbus' Paul Isnard gold project in French Guiana, but it's not unreasonable to think Nordgold will want to own the entire asset. As the after-tax NPV8% of the project is almost half a billion dollars (using a gold price of $1,300/ounce), Columbus Gold is trading at justone-third of the NPV, and making a deal on Paul Isnard might create a win-win situation for both parties involved.

We see a similar situation in Argentina, where Silver Standard Resources Inc. (SSO:TSX; SSRI:NASDAQ) is mulling over entering into a joint venture agreement with its neighbor Golden Arrow Resources Corp. (GRG:TSX.V; GAC:FSE; GARWF:OTCPK). Silver Standard needs to do "something" as the Pirquitas mine will very likely have to close in the near future. There's an agreement on the table where Silver Standard can earn a 75% stake in Golden Arrow's Chinchillas silver-lead-zinc deposit, but Silver Standard rarely deals with joint venture partners, and it might want to simplify the ownership structure by acquiring 100% of Chinchillas to make sure it can mine and operate both projects as efficiently as possible.

Staying in the silver sector, Southern Silver Exploration Corp. (SSV:TSX.V; SSVFF:OTCQB; SEG1:FSE) has also undergone a true metamorphosis. This company was trading as low as $0.03 per share earlier this year, but its share price has increased sixteen-fold (!) before catching its breath in the mid-$0.30s, where it is now. Southern Silver's Cerro Las Minitas in Mexico is shaping up to be larger than originally thought as the current resource estimate already contains 113 million silver-equivalent ounces. Southern Silver's official exploration target is 200 million silver-equivalent ounces, but after seeing the most recent drill results, that target seems to be relatively conservative.

Freeport McMoRan Copper & Gold Inc. (FCX:NYSE) was earning a stake in Cerro Las Minitas but walked away, not because Cerro Las Minitas is worthless, but because Freeport was (and still is) searching for large base metals (copper) projects and not for silver-lead-zinc systems, which typically attract a different crowd of companies. With the potential to discover in excess of 200 million silver-equivalent ounces (of which 60–90 million are "real" silver ounces), Cerro Las Minitas has undoubtedly popped up on a lot of radar screens.

But you don't have to go to Latin America to find potential takeover targets, as Canada also has some interesting prospects. Integra Gold Corp. (ICG:TSX.V; ICGQF:OTCQX) is one of the first companies that come to mind as the mineralization at its Sigma-Lamaque project continues to expand. An updated preliminary economic assessment (PEA) should be released after the summer, and the NPV of the project will probably at least triple. The PEA was originally expected to be released before the summer, but after encountering some exceptional drill results just a few hundred meters away from the Triangle Zone, Integra's management decided to postpone the PEA so it could potentially add the ounces from this No. 4 Plug to its resource estimate and incorporate it in a mine plan.

Practically anyone could be a suitor for Integra, as the company offers an excellent combination of high-grade gold mineralization in a mining-friendly region. Eldorado Gold already is an important shareholder, but just any midtier and senior producer could be interested in Integra Gold, as the company is now aiming to become a 200,000 to 250,000 ounce producer.

And, of course, there's more than just precious metals in the world, and the recent uranium discoveries in the Athabasca Basin could definitely be described as world class. NexGen Energy Ltd. (NXE:TSX; NXGEF:OTCQX) blew all expectations out of the water with a maiden resource estimate containing in excess of 200 million pounds (200 Mlb), but neighbor Fission Uranium Corp. (FCU:TSX; FCUUF:OTCQX; 2FU:FSE) is located within wheelbarrowing distance from NexGen, and both companies combined will very likely have in excess of 400 Mlb uranium.

Fission's Triple R deposit contains almost 110 Mlb uranium—and this is expected to increase toward the 150 Mlb mark as Fission is now trying to connect the mineralized systems at the different target areas—at an average grade of approximately 1.75% U3O8. However, there are higher-grade zones located within this resource estimate and Triple R has 45 Mlb in the Indicated resource category at an average grade of 18.22% U3O8.

All of the companies I've discussed here are buyout candidates, and their market capitalizations are still attractive for larger companies wanting to boost their project pipelines.

Thibaut Lepouttre is the editor of the Caesars Report, a newsletter and mining portal based in Belgium that covers several junior mining companies with a special focus on precious metals and base metals. Lepouttre has a Bachelor of Law degree and two economics masters degrees that have forged his analytical approach to the mining sector. Considered a number cruncher, Lepouttre focuses on the valuations of companies and is consistently on the lookout for the next undervalued mining company.

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Disclosure:
1) The following companies mentioned in the article are sponsors of Streetwise Reports: Columbus Gold Corp., Golden Arrow Resources Corp., Integra Gold Inc., Southern Silver Exploration Corp., NexGen Energy Ltd. and Fission Uranium Inc. The companies mentioned in this article were not involved in any aspect of the article preparation or editing so the expert could write independently about the sector. Streetwise Reports does not accept stock in exchange for its services. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
2) Thibaut Lepouttre: I or my family own shares of the following companies mentioned in this article: Integra Gold Inc., Columbus Gold Corp., Nordgold N.V., Fortuna Silver Mines Inc. I personally am or my family is paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: Integra Gold Inc. I determined which companies would be included in this article based on my research and understanding of the sector.
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